Real Estate----An ever appreciating investment option

Real estate means immovable property, such as land, and everything else that is permanently attached to it, such as residential buildings, malls, factory sheds etc. When you acquire real estate you also acquire the rights of possession, control and transfer.

Real estate investment involves buying of property with an aim to generate income through rental or lease and to achieve capital appreciation at the same time.

Understanding real estate investment is crucial because it usually involves a much higher investment than while investing in bonds, shares, gold or even a piece of art.

There are different ways of participating in real estate investment. You can buy a house/flat with an aim to rent the property out to a tenant. You will earn a continuous stream of rent from the tenant, but you will be responsible for paying taxes and the costs associated with maintaining the property. You will benefit from capital appreciation (a rise in the value of the property over time). You will run the risk of not finding a tenant and could suffer negative monthly cash flows with mortgage payments and maintenance charges.

Before purchasing a property one must keep in mind, the location, value and researching the title of the property.

One of the biggest advantage of investing in real estate is you will get bank loans at attractive rates. This is the only investment that you can make on borrowed money not only on very attractive rates and low margin (70-80% of the value can be obtained as loans), but you can get tax benefits too. Banks will not loan you money to buy shares, gold or any other investment at such low margins and low rates. Finally, the best argument for appreciation of real estate is perhaps the earth is getting no bigger while the population is increasing by the second.

Real Estate trading. Real estate traders generally purchase properties when a project is launched and thus can get the best deal in terms of price as well as the location of the unit. As the apartment complex comes nears completion, the trader generally sells off his/her unit and make a substantial gain. The risks involved in such trades are the apartment may take more time than anticipated and thus a higher lock-in period.

REITs or real estate investment trust is a corporation that invests in real estate. REITs can be equity REITs, mortgage REITs or hybrid REITs. REITs trade on major exchanges. A REIT uses investors' money to acquire and operate properties. As of now REITs are not yet available in India but will be available sooner than later.

The benefits of REITs are: REITs provide regular income in the form of dividends. Investors gain exposure to non-residential investments (like malls and office buildings). REITs are highly liquid and traded in the exchanges.

Like any other investment, before making an investment in real estate, you need to evaluate your risk appetite and investment capacity.

Art as Investment

The popularity of art as an alternative investment has risen significantly over the years, specially so following the financial crisis of 2008 due to a prolonged downturn in the stock market, a slowdown in the economy and low interest rates. Art is an alternative investment avenue which is considered profitable albeit extremely risky.

Art as an investment has been debated for long, but the corporate scandals, stock market losses and low interest rates have helped it to re-emerge.

Critics say art can never be considered as financial asset as investing in art disregards the traditional yardsticks of financial analysis since they do not generate income streams (interest payment as in bonds, rentals as in real estate or dividends as in stocks) that can be discounted. It is a bet on the price appreciation (as in commodities) of something whose value defies financial logic.

Whilst some artworks have appreciated enormously in value over time (Tyeb Mehta), it is difficult to make a case for artworks overall.

Art market is illiquid, opaque and unregulated. Transaction costs are too high, sometimes up to 30% and may in fact wipe out the profits. In the short-term, the art market volatility is relatively high compared with other asset classes.

The value of an art piece, art lovers say, will never go down to zero and it will never do a Global Trust Bank.

For investment-quality art, the limited supply adds to the increasing demand, this would mean a definite price appreciation over the long run. The main attraction of art as an investment is its low correlation with other financial assets. Art has the ability to reduce the risk of a portfolio when combined with the other assets and Art combines passion and investment.

Even under purely financial aspects, art is a genuine contender for a portion of any sophisticated portfolio. Art as an investment cannot be overlooked for one unique reason, an ever-increasing demand coupled with an absolutely limited supply.

Valuing art is very different from valuing financial instruments. Each art is different and prices for individual works may be unpredictable and difficult to compare. Valuation is based more on human emotion than on anything else. Multiple bidders who like the same piece can make the sale price soar beyond all gestimates.

The key for art investing success, as in stocks, is predicting which works of art will increase in value. Investors who are not hesitant of high risk can make the biggest gains at the lower end of the market by investing in lesser known and new artists. The real problem though is that there are so many unknown or lesser known artists in the world and finding the one that will become the next Leonardo da Vinci, Michelangelo Buonarroti, or Vincent van Gogh can be next to impossible.

As each work of art is different and the markets are anything but transparent, evaluating quality and price requires knowledge of the market inside out and art markets are often cloaked by veil of secrecy. There is no official registration office or certification authority that can authenticate the ownership of individual artworks. Other transaction risks include absence of clear title, forgery, mislabeling, and auction fraud. Another risk of investing in art is the ever changing taste of the so-called progressive art circles and thus taste swings can devaluate a piece of art temporarily. The upper end of the market although does not carry this particular risk and masterpieces will never lose value.

Most people who have made money over the years by buying and selling art had not bought art as an investment. Nearly everyone associated with the art market will emphasize that investment should never be the sole or even the primary reason to buy art. Art lovers buy what they love and even though it might go through a temporary devaluation (relatively known artist) or might never command a high price (new artists), the intrinsic value of the work (deriving visual pleasure) will always be there.

Among other things, many art owners view art as a symbol of their social status. This is an attribute which has existed for hundreds of years and in all likelihood will continue till eternity regardless of the merits of art as an investment. It is this attribute associated with art that creates an ever increasing number of people willing to pay through their nose to differentiate themselves in the society that will make art a profitable investment.

Worth Its Weight In Gold

Gold prices are linked to the strength of the dollar. The dollar is expected to weaken over the long-term and thus the demand and price of gold is expected to rise. Central banks of several countries have started adding to their gold reserves, notably RBI has recently bought 200 MT of gold from IMF. In the last 18 months, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%. This goes on to prove that gold will continue to hold its position as an alternative investment.

Gold can be bought in various forms and shapes. If you plan to buy gold as an investment, you can either buy it in the form of physical gold - bars, biscuits and/or coins or as exchange traded funds (ETF).

For most of us (Indians), gold purchases usually mean buying jewellery. Gold is perhaps the only asset class that you can wear (except to some extent platinum and silver). However, the disadvantage of buying gold in the form of jewellery is that its resale is hardly ever profitable. This is because when you go to sell the jewellery, the jeweller discounts what you paid as 'making charges' from the value of your jewellery. This shaves off a significant part of your investment. Its second disadvantage is that most jewellers do not give you cash for your gold, instead they allow you to exchange it for gold - jewellery or maybe a bar or coin making your investment in gold permanent. However, if your reason for buying gold is enjoying, wearing or flaunting it, just go for it.

Secondly, gold bars, biscuits and/or coin is another way of investing in physical gold. Again, here banks that sell gold bars charge a premium/commission as high as 10-15 percent for providing you with a 'certificate of purity'. However, when it's time to sell your gold, the bank does not buy it back and the jeweller that you sell it to will not pay for the certificate. So actually you end up paying a premium with no real value addition.

Finally, the exchange traded funds or ETFs. ETFs are the best way of investing in gold because it trades like a share, can be bought or sold in the exchanges and the price is the market price of gold. It is safe because gold ETF ensures that the custody and quality of gold is consistent. It is secure because the custodian (fund houses) stores the physical gold when they sell the ETF units. The transactions are secure because it takes place in stock exchanges and electronically. The costs involved are low as the expenses incurred in buying and selling Gold ETF are much lower than the cost of physical gold (commissions to the bank or making charge to the jweller).

An investment in gold should be based on macroeconomic considerations, i.e., fears of rising inflation, destabilizing deflation, or another financial crisis. A reasonable allocation in a conservative, diversified portfolio should be anywhere between 0 to 3%.

It should be noted equities or mutual funds dealing with gold mining companies offer greater leverage than direct ownership of the metal itself.

Today, like all investments and commodities, the price of gold is ultimately driven by demand and supply. Unlike most other commodities chances are that most of the gold ever mined still exists and is potentially able to come on to the market for the right price.